New aggressive strategy to launch new models and regain 20% market share

In 2002, S. P. Suzuki (SPSU) achieved sales growth of 45.5% due to improving economic environment and lower interest rates. Total industry unit sales grew by 47.9%. Meanwhile, Suzuki's share of the market improved one percentage point from 12% to 13% due to the popularity of its new models – Smash and Smash Junior.

Yesterday, we had a chance to visit with SPSU's management about the growth prospects of the industry and the company this year. The management said that Suzuki is adopting a much more aggressive strategy with target market share of 15% this year and ultimately 20%. The company plans to achieve this by 1) moving its Research & Development base for the Asia region to Thailand; 2) launching at least one new model per quarter; and, 3) adopting a more intensive market promotion strategy. Suzuki launched the New Smash in January and plans to introduce a new model at the end of this month.

We are maintaining our "BUY" recommendation on SPSU, as we anticipate the company's more aggressive strategy will produce strong earnings growth. We are forecasting earnings growth of 79% this year to Bt276mn (EPS of 3.49). At the current price, SPSU's shares look attractive on a PER of 5.3x, EV/EBITDA of 2.6x, and P/BV 0.63x. In addition, the company is in a strong financial position with net cash. Our DCF model produces a fair value estimate of Bt23.

SPSU's income statement (Bt mn)

Note: COGs does not include Depreciation and Amortisation

• SPSU's management believes that total industry motorcycle sales will grow by 25%. This forecast is conservative, however, compared to Honda's projection of a 35% growth rate to 1.8 million units. Suzuki targets market share of 15% this year from 13% last year and eventually 20%. Based on Honda's projection and a 15% market share, Suzuki sales would increase to 270,000 units. As SPSU is Suzuki's exclusive dealer in Thailand - apart from 14 provinces in the south - we estimate that its sales will climb 48% this year to Bt5,805mn while net profit will surge 79% to Bt274mn.

• Suzuki has set up a Research and Development base in Thailand. The company will try to replicate last year's success of new model launches – Smash and Smash Junior by launching at least one new model each quarter. The new models will focus on the lower end of the price range of Bt27,000-28,000, compared to Smash Junior list price of Bt29,800.

• This year, Suzuki plans to adopt a more aggressive strategy in sales promotion and advertising, such as 1) special promotion offering free servicing and repair through the dealers, 2) special promotion offering free insurance and 3) more mass media advertising, particularly television and radio.

• Suzuki's sales in February were down 16% from the previous month, which resulted in its market share falling to 13% from 15% in January. This is partially due to preparation for Suzuki's new model launch scheduled at the end of this month. The management believes the new model will be as successful as the Smash Junior.

• Thai Suzuki Motor plan to invest around Bt500mn this year and Bt500mn next year to expand its capacity for four-stoke models from 200,000 units to 350,000 units this year and 500,000 units next year. Thai Suzuki Motor does not need to increase capital to finance the expansion project since the company already has about Bt1bn cash on hand. SPSU holds about 18% of Thai Suzuki Motor.

• SPSU's dividend policy is at least 30% of net profit. Since the company achieved a net profit of Bt154mn (EPS of 1.95) last year, we assume that SPSU will pay out of dividend of around Bt0.7 per share.

• The management said that the company is currently studying the possibility of splitting par in a bid to improve trading liqudity.

• SPSU invested around Bt19mn last year to solve a distribution problem. The company's old distribution system could not handle the strong increase in number of orders in the fourth quarter last year. According to management, the new distribution system should be sufficient for the high growth in sales projected for this year.

• Using our PE Band model, we estimate that SPSU shares should trade at a PER of 6x, or Bt21. Based on our DCF model, however, the fair value for SPSU is slightly higher at Bt23.